Before You Jump

If you receive money in return for your software, there are only three legal mechanisms under which you may trade:

♦ Private individual

♦ Partnership

Trading as a Private Individual

As a private individual, you can trade either under your own name (for example, Bill Smith) or as yourself trading as a wholly owned entity (such as Bill Smith trading as Bill Smith Software).

Whereas your name is legally considered unique to you, you should ensure that when you use it to trade with, it is not being used by anyone else. Otherwise, you could be accused of trying to pass yourself off as another firm. This is why you often see trading names qualified in various ways such as "Bill Smith trading as Bill Smith Software" or "Smith Software (London)."

This is often referred to as sole proprietorship or a sole trader. One person runs the entire business—with or without hired help.

Sole proprietorship will give you no legal protection against creditors if you go bust. This can literally mean selling your house and almost everything in it to pay off your debts. However, you can usually set off your private gains against your trading losses.

For small operations, where turnover is low and there are no liabilities, trading as a private individual is a real option. If you choose this route, there is nothing to stop you from incorporating later.

Trading as a Partnership

Partnerships are shared businesses with a legal status between that of an individual and a company. The arrangement is common among professions such as law, architecture, and medicine. Indeed, in some countries, it is these professions' only allowable form.

In ordinary commercial operations a partnership rarely lasts longer than it takes for one partner to realize that he can fare just as well without the other. Partnerships are rarely found in established software houses.

However, some people just drift into them. What often happens is that one person has an idea and works on it until he hits a snag. Then a very useful helper appears. Without any formal discussion they gradually begin to collaborate. In the United States this is sufficient for them to be classed as partners and jointly be legally accountable. After a while the project may prosper sufficiently for the partners to enter a formal agreement. If things go even better, they may elect to turn their partnership into a jointly owned company with limited personal liability.

Trading between Limited Liability Companies

Limited liability companies come in two forms: private and listed. Listed companies can issue shares that are tradable on a major stock exchange. Private companies cannot.

Publicly listed companies have to disclose regular financial information to the public such as their sales, expenses, profits, assets, liabilities, as well as more sensitive issues such as management remuneration packages.

Private companies have the same legal protections and tax advantages as public ones, but the returns they complete are usually less stringent.

In the United States, private companies represent about 99 percent of the 15 million organizations existing. In the United Kingdom, there is a private company for every 15 people.

In the United States, a subsidiary firm can be called an "affiliated company," which is classified as a separate company type. Affiliates occur when an incorporated company (a corporation) buys another firm (the firm becomes an affiliate). Alternatively, they set up a new division, which they can classify as the affiliate.

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